If you are affected in any way by rand movements (and who isn’t), you have no doubt asked (or heard) this many times after a particularly volatile day: What made the rand move? What news? What event? What release of data? What dumb political statement? This is the common knee-jerk reaction to market movements, but that is not how markets work, and while there can be particularly sharp market movements around important releases of data (like US non-farm payrolls), it is important to understand that it is not the data or news that moves the markets, but how persons interpret the data – based on their emotions at that time. We know this in ourselves – when we are really upbeat, we will simply discount bad news, or find a positive spin in it. Exactly the opposite occurs when we are pessimistic – we will write off good news or find something negative about it. It depends on our underlying emotions and sentiment at the time, and markets are moved by the actions of those trading in the market, based on the mass underlying sentiment at the time. There are two underlying forces driving rand movement – fundamentals and sentiment. Fundamental competitiveness is crucial to our manufacturing and export health, and over the long term these fundamentals will bring exchange rates back to realistic and competitive levels. But while this is so, there are massive swings around equilibrium (as can be seen from the chart). The reason for these huge swings is not fundamentals or import/export activity, but mass human emotion (investor sentiment), with the major players being foreigners (69% of the $17.5 million daily turnover on the rand). And these swings in sentiment have moved from one extreme to the other – both sides of fair-value. The last long-term extreme in sentiment was mid-2011 and since then we have been and are still in a rand negative trend. In this environment, we can expect increasingly negative reactions to news, events, economic data and political statements until the next extreme is reached – which is some way off yet. For those interested in knowing more about the rand and how to make informed and educated decisions in your rand trades, join us for a webinar at 13h00 on March 14. For more specific forecasts over short, medium- and long-term, go to www. forexforecasts.co.za/go/ ZAROutlook
